Stronger-than-expected growth ends 2024 on a high, but economists warn of risks from potential US tariffs
Statistics Canada reported that real gross domestic product (GDP) in Canada increased by 0.6 percent in the fourth quarter of 2024, following a 0.5 percent rise in the previous quarter.
Growth was driven by higher household spending, increased exports, and business investment, though drawdowns in business inventories and higher imports tempered the overall expansion.
On an annualized basis, GDP grew 2.6 percent in the fourth quarter, surpassing the Bank of Canada’s forecast of 1.8 percent and analysts' expectations of 1.8 percent, according to Reuters.
Third-quarter GDP growth was revised upward to 2.2 percent annualized, from an earlier estimate of 1.0 percent.
Pierre Cléroux, chief economist at the Business Development Bank of Canada, told BNN Bloomberg that the stronger-than-expected GDP figures were influenced by lower interest rates.
“The numbers are very good; this is the impact of lower interest rates,” he said. He noted that increased consumption, real estate investment, and business investment all contributed to economic growth in the fourth quarter.
However, Cléroux also highlighted potential risks ahead.
“The Canadian economy is performing very well, but of course, this is before the uncertainty that we have right now around the tariffs. So, the first quarter of 2025 will probably be lower than that,” he said.
Household spending rose 1.4 percent in the fourth quarter, the fastest pace since the second quarter of 2022. Growth was led by purchases of new trucks, vans, and sport utility vehicles, followed by financial and telecommunication services.
For the full year, household spending rose 2.4 percent, with goods increasing 1.6 percent and services rising 3.0 percent. The largest contributors to this increase were vehicle purchases, rent, telecommunication services, and financial services.
Residential construction increased 3.9 percent in the fourth quarter, the largest quarterly gain since early 2021.
Ownership transfer costs, which reflect resale market activity, rose 12.5 percent, while new construction increased 2.2 percent, mainly due to single-home construction in Ontario. Alterations and improvements grew 1.5 percent.
Despite this quarterly gain, residential construction declined 1.1 percent in 2024, following an 8.5 percent drop in 2023.
Business investment in non-residential structures rose 0.7 percent in the fourth quarter, led by a 1.6 percent increase in building construction.
Investment in machinery and equipment climbed 4.2 percent, driven by spending on industrial machinery, aircraft, and other transportation equipment.
Intellectual property investment increased 0.6 percent, largely due to software development.
For 2024, non-residential business investment declined 1.8 percent. Investment in engineering structures fell 1.1 percent, following the completion of the Trans Mountain Expansion Project in May 2024.
Exports of goods and services increased 1.8 percent in the fourth quarter, led by higher shipments of unwrought gold, silver, and platinum group metals, crude oil and bitumen, and passenger cars and light trucks.
Imports rose 1.3 percent in the fourth quarter, with metal ores and concentrates, pharmaceuticals, and transportation equipment leading the increase. A decline in imports of unwrought gold, silver, and platinum group metals moderated the overall rise.
For 2024, exports increased 0.6 percent, led by crude oil and bitumen, travel services, and pharmaceutical and medicinal products. Imports also rose 0.6 percent, driven by travel services and clothing, footwear, and textiles.
Non-farm inventories declined in the fourth quarter, particularly in the manufacturing, wholesale, and retail sectors.
Motor vehicle inventories in wholesale and retail trade were the primary driver of the overall reduction.
The stock-to-sales ratio, excluding gold, fell to 0.88 as inventory levels declined while demand increased.
On an annual basis, non-farm inventories grew at a slower pace in 2024, increasing by $16.4bn compared to $28.2bn in 2023.
The GDP deflator rose 0.9 percent in the fourth quarter, mainly due to higher Canadian energy export prices. Household consumption prices increased 0.7 percent, while government expenditure prices rose 0.9 percent.
For the year, the GDP deflator increased 3.0 percent, accelerating from a 1.4 percent rise in 2023. The increase was largely driven by export prices, which rebounded 1.2 percent after a 3.7 percent decline in 2023.
Compensation of employees rose 1.0 percent in the fourth quarter, down from a 1.7 percent increase in the third quarter.
Wage growth was strongest in services-producing industries but was offset by a decline in transportation and storage services, which followed the Canada Post strike during the holiday season.
For 2024, employee compensation rose 5.9 percent, marking the slowest annual growth rate since the pandemic-related shutdowns in 2020. Wages in educational services rose 13.8 percent due to retroactive payments and collective bargaining agreements in multiple provinces.
The household saving rate fell from 7.3 percent in the third quarter to 6.1 percent in the fourth quarter, as disposable income grew 1.1 percent while spending increased 2.1 percent.
Despite the decline in net savings during the fourth quarter, the household saving rate for 2024 remained at 6.1 percent, higher than the 3.7 percent recorded in 2023.
Gross operating surplus for corporations increased 4.6 percent in the fourth quarter, following a 0.5 percent decline in the previous quarter. Growth was led by the manufacturing and wholesale sectors, particularly motor vehicle industries and construction-related businesses.
For financial corporations, gross operating surplus rose 0.2 percent in the fourth quarter, a slower pace compared to the second and third quarters. The banking industry contributed to this modest increase, but higher operating expenses limited overall growth.
Although property and casualty insurers make up a small portion of the financial sector's surplus, an increase in weather-related insurance claims in the third quarter had a significant impact on financial sector earnings in 2024.
Financial Post reported that Canada’s economy expanded 1.5 percent for the full year, but economists warn of potential risks in 2025 due to US tariff threats.
US President Donald Trump announced plans to impose a 25 percent tariff on all imports from Canada and Mexico, with a 10 percent tariff specifically on Canadian energy products.
Economists suggest this could weigh on economic growth and investment.
Tu Nguyen, economist at RSM Canada, told BNN Bloomberg that “without tariffs, the Canadian economy would enter 2025 on solid footing.” However, she noted that if tariffs take effect, the Bank of Canada may need to adjust its monetary policy accordingly.
The Bank of Canada has reduced its policy rate from 5.0 percent in June 2024 to 3.0 percent by January 2025.
Cléroux noted that price stability has largely been restored, with inflation running at 1.9 percent. He expects the central bank to lower rates further, potentially reaching 2.5 percent by summer 2025.
However, Financial Post cited Bank of Montreal economist Benjamin Reitzes, who suggested the fourth-quarter data may not fully reflect the economic impact of tariff threats.
He stated that “if Canada doesn’t get tariffed next week, the Bank of Canada will pause its rate cut campaign at the March 12 meeting.”
Bank of Canada Governor Tiff Macklem has warned that US tariffs could cause lasting economic damage, with estimates suggesting investment could decline by 12 percent and exports could shrink by 8.5 percent over two years.
Early estimates indicate GDP growth of 0.3 percent in January 2025, driven by increases in mining, wholesale trade, and transportation.
